Costs, environmental risks may scupper Falklands oil

BUENOS AIRES/LONDON — Oil exploration by British companies off the Falkland Islands is irritating old wounds with Argentina, where sovereignty claims over the remote South Atlantic archipelago are as strong as ever.

Thirty years after it repelled an Argentine invasion of the Falklands, Britain is vowing to defend the territory and says it will only negotiate sovereignty or oil rights if the 3,000 islanders want talks.

But if commercially viable quantities of oil do lie near the Falklands, Britain and British firms may find the potential costs of pumping a big discovery – or worse, dealing with a spill – a high price to pay.

“If there is a big find, I imagine the companies will be sued. There would very likely be legislation in the international courts. We’re going to do our best to curtail the financing of the companies and make their lives difficult,” Fernando Petrella, a former Argentine ambassador and deputy foreign minister, told Reuters.

“There is a case – these are disputed areas, these are non-renewable resources, there is the problem of the environment.”

In a thirsty world of shrinking hydrocarbon reserves, fields spurned by big oil are being mopped up by smaller companies and a cluster of British-based, London-listed companies have rushed to explore the new frontier of the Falklands basin.

The biggest find so far has been made by Rockhopper , which is exploring in the North Falklands. It is planning to start pumping oil by 2016 from its Sea Lion discovery, which it estimates holds about 350 million barrels of recoverable oil. The company said this week that minimum estimates for Sea Lion would likely rise after another successful drill.

Borders & Southern and Falkland Oil & Gas , meanwhile, kick off an exploration campaign south of the islands in late January, with a rig slated to drill two wells each .

Rockhopper’s find is significant by the standards of fields like the North Sea though small fry when compared to, say, the around 50 billion barrels thought to lie offshore Brazil.

The terms are appealing, however, and the companies have seen their valuations rocket.

“What mitigates the cost is the fiscal terms, they’re about as good as anywhere in the world,” London-based Oriel Securities analyst Richard Rose said.

Licences are awarded by the Falkland Islands governor in consultation with the British Foreign Office, with terms of 9 percent royalties and 26 percent corporate tax. In theory, any company could apply but the Falklands government would be unlikely to grant a licence to an applicant in which Argentine interests hold more than 49 percent, according to a leaked cable from the U.S. embassy in London dated February 2010.

POLITICAL RISK COSTS

The companies make little reference to the geopolitical tensions that are very much alive in Argentina, where the islands off its coast are known as Las Malvinas.

Every day in Buenos Aires, impeccably dressed naval officers stand guard by a monument listing those killed in the brief war 30 years ago. The dead are honored with an annual national holiday.

President Cristina Fernandez, who recently won re-election, has tried to throw spanners in the oil companies’ logistical works and campaigns tirelessly for international backing.

With the support of neighbouring Brazil and Uruguay, Argentina has already ensured the companies cannot count on South America as part of their supply chain. It has insisted that any boat passing through its waters has a permit, escalating tensions with Britain by intercepting Spanish fishing vessels operating with British licences .

Although Rockhopper thinks it can build production facilities without access to South American ports, its plan to use a floating vessel to store oil before periodically offloading it onto shuttle tankers will add to its costs.

It has said it needs $2 billion to build the project but has not yet said where the money will come from .

All the companies exploring in the area need larger partners with big pockets to launch further development.

But oil firms with more lucrative South American interests will not want to risk riling the governments of those nations.

“Companies looking at the Falklands in the grand scheme of things might just think the size of the prize isn’t worth it given their wider interests,” said Ruaraidh Montgomery, an analyst at Wood Mackenzie in London.

OIL ON TROUBLED WATERS

The costs of shipping oil pale into significance compared to the costs – both financially and reputation-wise – of a spill.

BP is still dealing with the fallout of the 2010 Deepwater Horizon spill, while a relatively small spill off Brazil last month has landed Chevron and Transocean with a $10.6 billion lawsuit and raised questions about Brazil’s offshore development plan .

Argentina’s reaction to oil-slicked penguins washing up on the coast of Patagonia – the closest area to the disputed islands, and location of numerous schools, roads and monuments named after the Malvinas – would be furious.

“I wouldn’t like to imagine that. It’s a very, very bad scenario,” said ex-minister Petrella. “The international responsibilities and liabilities could be enormous.”

Britain’s Foreign Office refused to comment on whether or not it had run scenarios on what it would do if there were a spill.

Asked whether the potential gains were worth the risk, a spokesman said: “The Falkland Islands government is entitled to develop a hydrocarbons industry within its waters … We are absolutely clear that this is legitimate business.”

Argentina’s Foreign Ministry declined to comment.

A British parliamentary report last year asked for clarity over responsibility for oil spills and raised questions about smaller companies’ ability to foot the bill for a big spill.

The Falklands government says it has adopted rigorous environmental regulations.

But located some 8,000 miles (13,000 km) from Britain and with annual revenues from taxes and fishing of just over 42 million pounds ($66 million) in 2010, the challenges the islands would face if there were a spill are obvious.

Mistakes could easily lead to an escalating crisis, said Argentine political analyst Rosendo Fraga.

“If there were issues like spills, Argentina would likely react within the policy framework it is developing, seeking to isolate Britain from the other countries in the region and create costs for the British presence in the islands,” he said.

Other Latin American states are supportive of Argentina and have urged Britain to hold sovereignty talks .

Aggressive military action on the part of Argentina is almost certainly out of the equation, however. The ill-conceived invasion of 1982 was launched when Argentina’s leader Leopoldo Galtieri was desperately trying to revive a discredited military dictatorship.

A poll last year showed that while more than half of Argentines want the government to press the sovereignty claim, only 3 percent want to see military action.

For as long as the issue remains a unifying national cause, it is likely to remain high on the agenda for Argentine leaders, especially if the fast-growing economy cools down.

“The Malvinas is always good to have as a reserve so if you need to distract public attention you can pull out that card,” said Mark Jones, a Latin America expert at Rice University in Houston.

For the former minister Petrella, oil production will only be feasible if Britain and Argentine reach some kind of accord.